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MORTGAGE FINANCE AND HOUSING |
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Mortgage financing has become an increasingly important element in the economy, involving a wide range of financial institutions from commercial banks, thrifts and credit unions to finance companies, life insurers and government-sponsored enterprises like Fannie Mae. In 2007 home mortgage debt outstanding amounted to $11.2 trillion, up from $7.2 trillion in 2003.
Demographic factors such as the size of various age groups within the population and changes in disposable income, interest rates and the desirability of other investment options influence the residential mortgage market. The commercial market has expanded in response to business growth.
The total mortgage market grew 8.1 percent in 2007 from the previous year. In the home mortgage sector, the combined mortgage holdings of commercial banks and savings institutions rose 4.7 percent and the holdings of credit unions rose 11.5 percent. Holdings of finance companies fell 11.9 percent in 2007.
The term mortgage origination refers to the original transaction, the point at which the homeowner purchases the mortgage, in person or online, from a financial services company such as a bank.
Mortgages may be sold and packaged as securities, which frees up funds for the mortgage originator to make additional mortgages available. Mortgage-backed securities are sold by asset-backed securities (ABS) issuers. The sale transfers the risk of default from the originator to the ABS buyer.
The bank that originates the mortgage does not always “service” the mortgage itself. It may sell the servicing of the mortgage, which includes collecting and processing monthly payments, to another company. The servicing business of many of the leading mortgage originators is much larger than their origination business.
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TOTAL MORTGAGES, 2003-2007
($ billions, end of year)
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2003 |
2004 |
2005 |
2006 |
2007 |
| Total mortgages | $9,397.7 | $10,667.7 | $12,101.5 | $13,511.7 | $14,603.4 |
| Home | 7,230.5 | 8,273.4 | 9,379.4 | 10,451.7 | 11,158.3 |
| Multifamily residential | 564.9 | 617.9 | 687.7 | 741.2 | 837.2 |
| Commercial | 1,508.3 | 1,679.6 | 1,932.9 | 2,209.9 | 2,490.5 |
| Farm | 94.1 | 96.9 | 101.5 | 109.0 | 117.5 |
| Source: Board of Governors of the Federal Reserve System, June 5, 2008. |
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HOME MORTGAGE-BACKED SECURITIES
Home mortgages are increasingly being packaged into securities and sold to investors.The dollar volume of such securities increased by 74 percent from 2002 to the third quarter of 2007.
While the majority of mortage securities (65.3 percent) are backed by agency- and government-sponsored enterprises such as Fannie Mae, the dollar volume of privately issued mortgage securities has been rising dramatically, with the amount outstanding for such securities increasing by 300 percent since 2002.
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SECURITIES COMPRISED OF HOME MORTGAGES,
CLASSIFIED BY ISSUER, 2002-2007
($ billions, amounts outstanding, end of period)
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2007 (1) |
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2002 |
2003 |
2004 |
2005 |
2006 |
First quarter |
Second quarter |
Third quarter |
| Home mortgages backing privately issued pool securities | $544.1 | $664.0 | $1,049.8 | $1,557.2 | $2,053.3 | $2,149.2 | $2,228.6 | $2,179.3 |
| Agency- and GSE (2)-backed mortgage pools | 3,063.7 | 3,211.2 | 3,269.9 | 3,437.5 | 3,720.1 | 3,830.6 | 3,946.3 | 4,109.3 |
| Total | $3,607.8 | $3,875.2 | $4,319.7 | $4,994.7 | $5,773.4 | $5,979.8 | $6,174.9 | $6,288.6 |
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(1) Not seasonally adjusted.
(2) Government-sponsored enterprise.
Source: Board of Governors of the Federal Reserve System, Flow of Funds Accounts of the United States, December 7, 2007. |
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HOME MORTGAGES BY HOLDER, 2003-2007 (1)
($ billions, end of year)
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2003 |
2004 |
2005 |
2006 |
2007 |
| Total assets | $7,230.5 | $8,273.4 | $9,379.4 | $10,451.7 | $11,158.3 |
| Household sector | 106.3 | 112.4 | 118.5 | 124.6 | 130.7 |
| Nonfinancial corporate business | 26.1 | 39.9 | 40.6 | 31.0 | 21.4 |
| Nonfarm noncorporate business | 9.7 | 11.3 | 13.3 | 14.9 | 17.0 |
| State and local governments | 67.8 | 72.0 | 76.5 | 80.4 | 85.2 |
| Federal government | 15.3 | 14.8 | 14.4 | 14.6 | 14.8 |
| Commercial banking | 1,355.8 | 1,581.0 | 1,793.0 | 2,081.8 | 2,208.3 |
| Savings institutions | 702.8 | 874.2 | 953.8 | 867.8 | 879.0 |
| Credit unions | 182.6 | 213.2 | 245.6 | 276.6 | 308.4 |
| Life insurance companies | 7.1 | 7.9 | 7.7 | 11.3 | 11.1 |
| Private pension funds | 1.7 | 1.4 | 1.4 | 1.3 | 1.2 |
| State and local government retirement funds | 7.3 | 5.4 | 5.9 | 5.1 | 4.5 |
| Government-sponsored enterprises | 514.7 | 508.0 | 454.9 | 457.2 | 450.8 |
| Agency- and GSE (2)-backed mortgage pools | 3,211.2 | 3,256.3 | 3,419.7 | 3,710.6 | 4,320.0 |
| ABS issuers | 664.0 | 1,049.8 | 1,609.7 | 2,105.5 | 2,132.4 |
| Finance companies | 320.2 | 422.0 | 489.8 | 538.1 | 474.2 |
| REITs | 37.8 | 103.7 | 134.5 | 130.9 | 99.4 |
| Home equity loans included above (3) | 592.8 | 773.3 | 911.6 | 1,060.8 | 1,125.0 |
| Commercial banking | 366.0 | 483.5 | 549.0 | 653.6 | 692.3 |
| Savings institutions | 95.6 | 121.2 | 151.6 | 137.6 | 180.5 |
| Credit unions | 51.7 | 63.9 | 75.9 | 86.9 | 94.1 |
| ABS issuers | 15.6 | 21.0 | 37.1 | 75.1 | 63.3 |
| Finance companies | 64.0 | 83.7 | 98.0 | 107.6 | 94.8 |
(1) Mortgages on 1 to 4 family properties.
(2) Government-sponsored enterprise.
(3) Loans made under home equity lines of credit and home equity loans secured by junior liens. Excludes home equity loans held by mortgage companies and individuals.
Source: Board of Governors of the Federal Reserve System, June 5, 2008. |
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AVERAGE CONVENTIONAL SINGLE-FAMILY MORTGAGES, 1997-2006 (1)
($000)
Year |
Mortgage loan amount |
Purchase price |
Adjustable rate mortgage
(ARM) share (2) |
| 1997 | $126.6 | $164.5 | 22% |
| 1998 | 131.8 | 173.4 | 12 |
| 1999 | 139.3 | 184.2 | 21 |
| 2000 | 148.3 | 198.9 | 24 |
| 2001 | 155.7 | 215.5 | 12 |
| 2002 | 163.4 | 231.2 | 17 |
| 2003 | 167.9 | 243.4 | 18 |
| 2004 | 185.5 | 262.0 | 35 |
| 2005 | 211.9 | 299.8 | 30 |
| 2006 | 222.3 | 306.4 | 22 |
(1) National averages, all homes.
(2) ARM share is the percent of total volume of conventional purchase loans. Does not include interest-only mortgages.
Source: Federal Housing Finance Board, Monthly Interest Rate Survey. |
| - Adjustable rate mortgages (ARMs), loans in which the interest rate is adjusted periodically according to a pre-selected index, accounted for 22 percent of mortgage originations in 2006, down from 35 percent in 2004 and 30 percent in 2005.
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INTEREST-ONLY MORTGAGES
In interest-only mortgage arrangements, the borrower pays only the interest on the capital for a set term. After the end of that term, usually five to seven years, the borrower either refinances, pays the balance in a lump sum or starts paying off the principal, in which case the monthly payments rise. The vast majority of interest-only mortgages are adjustable rate mortgages (ARMs), according to First American LoanPerformance.
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INTEREST-ONLY MORTGAGES AS A PERCENT OF ALL MORTGAGE ORIGINATIONS, 2002-2006
| - In 2006 loans with interest-only features accounted for 30 percent of originations in California, Nevada, Colorado and Arizona, compared with 22 percent nationally, according to a 2007 Harvard report.
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MORTGAGE DELINQUENCY AND FORECLOSURE RATES, 1997-2006
(Percent, annual average)
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TOP TEN MORTGAGE FINANCE COMPANIES BY MANAGED RECEIVABLES, 2006
($ millions)
Rank |
Company |
Total managed receivables (1) |
| 1 | Wells Fargo Home Mortgage Inc. | $1,341,900.0 |
| 2 | Countrywide Financial Corporation | 1,298,394.0 |
| 3 | Washington Mutual Bank | 710,800.0 |
| 4 | Chase Home Finance, LLC | 645,800.0 |
| 5 | Residential Capital, LLC | 503,973.0 |
| 6 | Citigroup Inc. | 500,061.0 |
| 7 | Bank of America Corporation | 391,235.7 |
| 8 | Wachovia Corporation | 237,702.0 |
| 9 | ABN AMRO Mortgage Group Inc. | 229,900.0 |
| 10 | Midland Loan Services, Inc. | 213,412.0 |
| (1) On-balance sheet receivables and loans sold that are still serviced and managed.
Source: SNL Financial LC. |
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HOME EQUITY MORTGAGE LOANS
The amount of home equity outstanding almost doubled from $592.8 billion in 2003 to $1.13 trillion in 2007.
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HOME EQUITY MORTGAGE LOANS BY HOLDER, 2003-2007 (1)
($ billions, end of year)
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CASH OUT HOME MORTGAGE REFINANCING, 1998-2007 (1)
($ billions)
(1) Represents homeowners’ cash withdrawals from home mortgage refinance transactions. Includes prime conventional loans only and are net of retirement of outstanding second mortgages.
(2) Estimated.
Source: Freddie Mac.
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SUBPRIME LOANS
Subprime loans are offered to applicants with an incomplete or less than perfect credit record. The subprime interest rate is generally higher than the prevailing rate because of the additional risks involved in lending to less creditworthy applicants. ln 2006, subprime residential mortgage originations totaled $321 billion, according to an analysis of data on home loans as reported under the federal Home Mortgage Disclosure Act (HMDA). HMDA, enacted by Congress in 1975, requires most mortgage lenders located in metropolitan areas to report data to the federal government about their housing-related lending activity. In 2006, subprime residential mortgage originations declined 26 percent in terms of loan count and 22 percent in terms of dollar volume, according to the Mortgage Bankers Association.
Subprime loans are often bundled into asset-backed securities (ABS) or home equity ABS and sold to the capital markets through lenders' relationships with investment banks, according to a July 2007 report by JP Morgan Asset Management. Home equity ABS increased from $33.1 billion in 1995 to $581.2 billion in 2006, according to a Securities Industry and Financial Market Association analysis of amounts outstanding. In 2007 an increase in subprime mortgage defaults contributed to a string of failures in the mortgage market.
The turmoil in the subprime markets has led to a surge in litigation. There were 278 lawsuits related to subprime mortgages filed in federal courts in 2007, according to a study by Navigant Consulting. Another 170 lawsuits were filed during the first quarter of 2008. The majority (76 percent) of the new cases were class actions.
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SINGLE FAMILY (1 TO 4 UNIT) SUBPRIME ORIGINATIONS, 2005-2006
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Number |
Dollar volume
($ millions) |
Type of loan |
2005 |
2006 |
Percent change |
2005 |
2006 |
Percent change |
| Purchase originations | 1,121,810 | 792,191 | -29.4% | $166,033 | $125,955 | -24.1% |
| Refinance originations | 1,253,324 | 968,774 | -22.7 | 228,979 | 184,556 | -19.4 |
| Mortgages taken out for home improvements | 102,085 | 80,880 | -20.8 | 16,014 | 10,409 | -35.0 |
| All originations | 2,477,219 | 1,841,845 | -25.6 | 411,026 | 320,920 | -21.9 |
| Source: Mortgage Bankers Association. |
| - In 2006, subprime mortgages accounted for about 13 percent of all mortgage originations, in terms of loan and dolllar volume.
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TOP TEN SINGLE FAMILY (1 TO 4 UNIT) RESIDENTIAL MORTGAGE LENDERS SUBPRIME ORIGINATIONS, 2005
($ millions)
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All originations (1) |
All purchase originations |
All refinance originations |
Rank |
Lending institution |
Dollar
volume |
Percent |
Dollar
volume
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Percent |
Dollar
volume
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Percent |
| 1 | Argent Mortgage Company, LLC. | $43,702 | 10.6% | $18,458 | 11.1% | $25,120 | 11.0% |
| 2 | New Century Mortgage Corporation | 40,838 | 9.9 | 19,481 | 11.7 | 19,592 | 8.6 |
| 3 | Fremont Investment and Loan | 36,144 | 8.8 | 18,498 | 11.1 | 16,878 | 7.4 |
| 4 | Option One Mortgage Corporation | 35,883 | 8.7 | 13,671 | 8.2 | 19,680 | 8.6 |
| 5 | Washington Mutual Bank, FSB | 28,411 | 6.9 | 17,926 | 10.8 | 10,013 | 4.4 |
| 6 | Ameriquest Mortgage Company | 27,457 | 6.7 | 586 | 0.4 | 26,417 | 11.5 |
| 7 | WMC Mortgage Corporation | 27,300 | 6.6 | 15,151 | 9.1 | 12,149 | 5.3 |
| 8 | Accredited Home Lenders, Inc. | 16,383 | 4.0 | 7,680 | 4.6 | 8,526 | 3.7 |
| 9 | AIG, FSB | 15,432 | 3.8 | 4,094 | 2.5 | 11,295 | 4.9 |
| 10 | Encore Credit Corporation | 13,391 | 3.3 | 3,572 | 2.2 | 9,779 | 4.3 |
| | Total, all lending institutions | $411,026 | 100.0% | $166,033 | 100.0% | $228,979 | 100.0% |
(1) Includes mortgage loans taken out for home improvements.
Source: Mortgage Bankers Association, based on 2005 Home Mortgage Disclosure Act data. |
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GOVERNMENT-SPONSORED ENTERPRISES
Government-sponsored enterprises (GSEs) are corporations created by Congress to assist groups of borrowers such as homeowners, mortgage lenders and farmers gain access to
capital markets. Three GSEs—the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal Home Loan Bank (FHLB) system—stand behind more than $4 trillion worth of mortgages, according to the Federal Reserve. Among other activities, these entities increase the supply of funds that mortgage lenders make available to buyers by purchasing mortgages from banks and other lenders, and packaging them into securities and selling them to investors.
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GOVERNMENT-SPONSORED ENTERPRISES (GSE), 2003-2007
($ billions, amounts outstanding, end of year)
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2003 |
2004 |
2005 |
2006 |
2007 |
| Total financial assets | $2,794.4 | $2,882.9 | $2,819.4 | $2,872.9 | $3,174.2 |
| Checkable deposits and currency | 28.8 | 39.1 | 14.6 | 16.4 | 13.7 |
| Time and savings deposits | 16.7 | 23.3 | 35.3 | 33.9 | 46.6 |
| Federal funds and security RPs (1) | 75.3 | 93.6 | 107.7 | 117.4 | 142.7 |
| Credit market instruments | 2,564.2 | 2,613.0 | 2,543.9 | 2,590.5 | 2,829.5 |
| Open market paper | 6.7 | 5.8 | 13.8 | 32.4 | 27.7 |
| U.S. government securities | 1,047.8 | 899.4 | 764.2 | 727.2 | 718.4 |
| Treasury securities | 13.5 | 12.9 | 13.1 | 14.2 | 15.5 |
| Agency- and GSE-backed securities | 1,034.3 | 886.5 | 751.1 | 713.0 | 702.9 |
| Municipal securities | 44.4 | 44.6 | 39.7 | 36.1 | 33.3 |
| Corporate and foreign bonds | 277.4 | 414.8 | 465.7 | 482.7 | 464.4 |
| Other loans and advances | 545.8 | 619.4 | 671.8 | 704.9 | 942.6 |
| Sallie Mae | 0.3 | 0.0 | 0.0 | 0.0 | 0.0 |
| Farm Credit System | 43.8 | 43.6 | 51.6 | 63.5 | 75.5 |
| FHLB | 501.7 | 575.8 | 620.2 | 641.4 | 867.1 |
| Mortgages | 621.5 | 629.0 | 588.8 | 607.2 | 643.1 |
| Home | 514.7 | 508.0 | 454.9 | 457.2 | 450.8 |
| Multifamily residential | 68.2 | 82.5 | 93.0 | 105.4 | 147.7 |
| Farm | 38.7 | 38.6 | 40.9 | 44.6 | 44.6 |
| Consumer credit (2) | 20.6 | 0.0 | 0.0 | 0.0 | 0.0 |
| Miscellaneous assets | 109.4 | 113.9 | 117.8 | 114.6 | 141.7 |
| Total liabilities | $2,747.1 | $2,818.0 | $2,736.8 | $2,782.0 | $3,076.6 |
| Credit market instruments (3) | 2,601.3 | 2,676.3 | 2,592.2 | 2,627.8 | 2,910.2 |
| Miscellaneous liabilities | 145.8 | 141.7 | 144.5 | 154.2 | 166.4 |
(1) Short-term agreements to sell and repurchase government securities by a specified date at a set price.
(2) Sallie Mae student loans.
(3) Consists of agency- and GSE-backed securities.
Source: Board of Governors of the Federal Reserve System, June 5, 2008. |
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AGENCY AND GOVERNMENT-SPONSORED ENTERPRISES (GSE)-BACKED MORTGAGES, 2003-2007
($ billions, amounts outstanding, end of year)
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2003 |
2004 |
2005 |
2006 |
2007 |
| Total financial assets | $3,326.7 | $3,374.6 | $3,541.9 | $3,837.3 | $4,463.7 |
| Home mortgages | 3,211.2 | 3,256.3 | 3,419.7 | 3,710.6 | 4,320.0 |
| Multifamily residential mortgages | 114.5 | 117.4 | 121.3 | 123.5 | 139.2 |
| Farm mortgages | 1.0 | 0.9 | 0.8 | 3.2 | 4.5 |
| Total pool securities (liabilities) (1) | $3,326.7 | $3,374.6 | $3,541.9 | $3,837.3 | $4,463.7 |
(1) Such issues are classified as agency- and GSE-backed securities.
Source: Board of Governors of the Federal Reserve System, June 5, 2008. |
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GOVERNMENT-SPONSORED ENTERPRISE SHARE OF 1- TO 4-FAMILY UNIT MORTGAGE DEBT OUTSTANDING, 1998-2007
($ millions)
Year |
Total volume |
Government-sponsored
enterprise share |
| 1998 | $4,609,259 | 38.8% |
| 1999 | 5,076,536 | 40.6 |
| 2000 | 5,533,642 | 41.1 |
| 2001 | 6,127,326 | 44.5 |
| 2002 | 6,924,669 | 45.9 |
| 2003 | 7,795,333 | 46.6 |
| 2004 | 8,891,272 | 43.3 |
| 2005 | 10,067,059 | 39.9 |
| 2006 | 11,192,815 | 38.7 |
| 2007 | 11,995,455 | 41.1 |
| Source: Office of Federal Housing Oversight. |
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